Foreign investors are retreating from Thai assets as an energy shock triggered by the US-Israeli war on Iran threatens to derail hopes of an economic revival under Prime Minister Anutin Charnvirakul, while exposing deepening policy paralysis in Bangkok.
The conflict has driven global oil prices close to $100 a barrel, intensifying concerns over Asia’s dependence on Gulf energy supplies. Thailand is among the most vulnerable, with nearly half of its oil and gas sourced from the Middle East, according to Krungsri Research.
Bangkok’s challenges are compounded by mounting fiscal strain. Public debt is nearing the government’s self-imposed 70% ceiling, while the economy had already slipped into deflation prior to the conflict, leaving Thailand in a more precarious position than many of its regional peers.
The downturn comes at a time when momentum had begun to build for Southeast Asia’s second-largest economy, with foreign investors returning to Thai markets for the first time in years.
Data from LSEG showed foreign investors purchased $1.7 billion in Thai equities in February. Mr Anutin’s decisive election victory that same month had raised expectations of renewed political stability and long-awaited economic reforms following years of turbulence.
However, sentiment reversed sharply after the outbreak of the Iran conflict at the end of February. Foreign investors recorded a net selloff of $823 million in equities in March, while bond outflows reached $705 million — the largest combined monthly outflow since October 2024.
A two-week ceasefire this month has lifted hopes of a potential resolution, prompting a rebound in Thai stocks and the baht. Even so, investors remain wary of the country’s exposure should oil prices remain elevated.
“The risk remains (that) markets remain complacent about the long-term impact from energy shock and that higher fuel costs hit consumption and disrupt exports and tourism, two key drivers of the Thai economy,” said Daniel Tan, a portfolio manager at Grasshopper Asset Management.
Khoi Vu, an ASEAN equity strategist at JPMorgan, said the bank remains cautious on Thai equities. While political stability had begun to improve the outlook prior to the Middle East conflict, he warned the energy shock presents a near-term headwind.
“As the energy shock has yet to fully materialise, we believe the market has yet to price in significant growth impact,” he said.
Limited Policy Options Ahead
With the fragile ceasefire in place, analysts and investors warn Thailand faces another challenging year.
Unlike many regional peers, Thailand’s vulnerability extends beyond fuel costs. More than half of its annual power generation is gas-based, while liquefied natural gas imports account for a growing share of electricity production.
Economic momentum remains weak. Thailand expanded just 2.4% last year, lagging regional peers, while inflation declined for 12 consecutive months — prompting a central bank rate cut in February, shortly before the war began.
“There’s a broad consensus among investors that Thailand is in a policy bind,” said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.
“The central bank has limited room to hike without derailing the recovery, but little urgency or space to ease, which leaves policy restrictive by default,” he added, noting he is underweight on Thailand.
According to state planning agency estimates, every one-baht increase in fuel prices reduces economic growth by two basis points, underscoring the government’s reluctance to expand subsidies.
“Higher oil prices could weigh on consumption, the current account and the baht, while also complicating the disinflation path and potentially limiting how much further rates can fall,” said Nattanont Arunyakananda, investment manager of Thai equities at Aberdeen Investments.
The conflict has also reshaped Thailand’s inflation outlook. Average inflation could rise as high as 3.5% this year depending on how the war evolves — a sharp reversal from a 0.54% contraction recorded in the first quarter.
Finance Minister Ekniti Nitithanprapas said on Friday that Thailand has limited policy tools available to address its economic challenges.
Sliding Baht Taking the Heat
The Thai baht has emerged as a key pressure valve, weakening about 2.8% since the conflict began, although it has recovered some ground following last week’s ceasefire announcement.
Regional currencies such as the Philippine peso and Indonesian rupiah have fallen to record lows. However, the baht’s earlier strength — having gained around 9% in 2025 — may provide some buffer and allow for further depreciation, analysts said.
Thailand now faces a delicate balancing act. While authorities have ruled out fuel subsidies for now, they are expected to absorb higher costs to keep electricity tariffs largely stable through the summer period.
Fiscal concerns continue to add pressure. Public debt currently stands at 66% of GDP, just below the 70% ceiling, raising investor concerns that the government may eventually need to lift the cap — though officials have so far ruled this out.
“If the shock extends beyond April, it stops being just a headline issue and starts feeding into day-to-day operations,” Aberdeen’s Mr Nattanont said.
